A 52-week high level generally works as an indicator for investors as stocks near that level are perceived to be winners.
Notably, investors often wonder if the stock is overpriced considering the high price level. While the apprehensions are not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, an investor might miss out on top gainers in an attempt to avoid the steep prices of stocks that are near their 52-week high mark.
However, a stock can maintain the momentum and keep scaling new highs with time. So, one should take a more informed approach to understand if any further upside is left.
Here we discuss a strategy to find the right stocks.
Borrowing from the basics of momentum investing, this technique bets on “buy high, sell higher.”
52-Week High: A Good Indicator
Many a time, stocks hitting a 52-week high fail to scale higher despite potential. This is because investors fear that the stocks are overvalued and a price crash is impending.
In fact, overvaluation is quite natural for most of these stocks as investors’ focus (or willingness to pay premium) has helped them reach the level. But that does not always mean an impending decline. Factors such as robust sales, surging profit levels, earnings growth prospects and strategic acquisitions that encouraged investors to bet on these stocks could keep them motivated if there is no tangible negative. In other words, the momentum might continue.
Also, when a string of positive developments dominate the market, investors find their under-reaction unwarranted, even if there are no company-specific driving forces.
Setting the Right Filters
We ran a screen to zero in on 52-week high stocks (trading near the high level) that hold tremendous upside potential. The screen includes parameters to shortlist stocks with strong earnings growth expectations, sturdy value metrics and price momentum.
Moreover, the screen filters stocks that are relatively undervalued compared to their peers, in terms of earnings as well as sales, ensuring continuation of their rally for some time.
Current Price/52 Week High >= .80
This is the ratio between the current price and the highest price at which the stock has traded in the past 52 weeks. A value greater than 0.8 implies that the stock is trading within 20% of its 52-week high range.
% Change Price – 4 Weeks > 0
It ensures that the stock price has moved north over the past four weeks.
% Change Price – 12 Weeks > 0
This metric guarantees a continued upward price momentum for the stock over the past three months as well.
Price/Sales <= XIndMed
The lower, the better.
P/E using F(1) Estimate <= XIndMed
This metric measures the amount an investor puts into a company to obtain one dollar of earnings. It narrows down the list of stocks to those that are undervalued compared to the industry.
One-Year EPS Growth F(1)/F(0) >= XIndMed
This helps choose stocks that have higher growth rates than the industry. This is a meaningful indicator, as decent earnings growth adds to investor optimism.
Zacks Rank <=2
No screening is complete without our proven Zacks Rank, which has proved its worth since its inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to brave adversities and beat the market. You can see the complete list of today’s Zacks #1 Rank stocks here.
Current Price >= 5
This parameter will help screen stocks that are trading at $5 or higher.
Volume – 20 days (shares) >= 100000
Inclusion of this metric ensures that there is a substantial volume of shares, so trading is easier.
Here are five of the 35 stocks that made it through the screen:
Colfax Corporation CFX is a Fulton, MD based manufacturing and engineering company, specializing in products and services related to air and gas handling, and fabrication technology. It caters to a diversified customer base in the power generation, oil, gas and petrochemical, mining, marine and general industrial and other end markets. The company delivered an average four-quarter positive earnings surprise of 7.9% and has a Zacks Rank #1.
United Therapeutics Corporation UTHR is a Silver Spring, MD-based company, which develops and commercializes therapeutic products for patients with chronic and life-threatening diseases. Currently sporting a Zacks Rank #1, the company delivered an average positive surprise of 20.3% for the last four quarters.
Trinseo S.A. TSE is a Berwyn, PA based materials company, which manufactures and commercializes synthetic rubber, latex binders, and plastic products in Europe, the United States, Asia Pacific, and other regions. The company has an average four-quarter positive earnings surprise of 4.02% and a Zacks Rank #1.
Xilinx, Inc. XLNX is a San Jose, CA based company, which designs and manufactures a broad range of high-performance, high-density programmable logic devices, such as field-programmable gate arrays (FPGAs) and complex-programmable logic devices. Currently carrying a Zacks Rank #2, the company delivered an average positive surprise of 6% for the last four quarters.
Archer Daniels Midland Company ADM is one of the leading food processing companies in the world. It procures, transports, stores, processes, and merchandises agricultural commodities and products. The company has an average four-quarter positive earnings surprise of 18.6% and a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Trinseo S.A. (TSE) : Free Stock Analysis Report
Colfax Corporation (CFX) : Free Stock Analysis Report
United Therapeutics Corporation (UTHR) : Free Stock Analysis Report
Xilinx, Inc. (XLNX) : Free Stock Analysis Report
Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
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